USCA1 Opinion

United States Court of Appeals

United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 93-1759
VICTOR MERINO CALENTI,
Plaintiff, Appellee,
v.
ALFONSO BOTO, ET AL.,
Defendants, Appellees,
____________________
RAFAEL MERINO VINAS, ET AL.,
Plaintiffs, Appellants.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Hector M. Laffitte, U.S. District Judge]
___________________
____________________
Before
Selya, Circuit Judge,
_____________
Bownes, Senior Circuit Judge,
____________________
and Stahl, Circuit Judge.

_____________
____________________

Patrick D. O'Neill with whom Anabelle Rodriguez and Martin

___________________
__________________
______
Odell & Calabria were on brief for appellants.
________________
Guillermo J. Bobonis with whom Bobonis, Bobonis & Rodrig
______________________
____________________________
Poventud and Roberto Corretjer Piquer were on brief for appellees.
________
________________________
____________________
May 23, 1994
____________________

STAHL,
shareholders
Puerto Rico

in a closely-held

claim against certain

the corporation, challenging the

amendment

incorporation.

Plaintiffs-appellants,

and largely family-dominated

corporation, brought this

directors of
proposed

Circuit Judge.
______________

The

to

the

amendment

corporation's
abrogated the

legality of a
articles

of

corporation's

right to redeem preferred shares at par value, and plaintiffs

argued that the amendment violated federal securities law and
Puerto Rico corporations law.

The district court, finding no

violation

of

either federal

or

Puerto

Rico law,

granted

summary judgment in favor of defendants.

We remand the state

law

the district

claims,

should

with the

admonition

consider dismissal

right to

that

without prejudice

bring those claims in state court.

court

to plaintiffs'
As to all other

issues, we affirm.
I.
I.
__
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
________________________________________
Ferreteria Merino, Inc.

(hereinafter "FMI" or "the

corporation") is a closely held Puerto Rico corporation which

sells hardware and home
FMI's certificate and
"the

improvement products in Puerto Rico.

articles of incorporation (hereinafter

articles") establish

two types of

stock:

common and

preferred.
The
shares

shall

articles provide,
have preference

-22

inter alia,
_____ ____
with

respect

that preferred
to payment

of

dividends, but that such shares shall not be accompanied by a

right

to

general

vote in,
meetings

articles, which

be notified
of

the

of,

or participate

corporation.

In

addition,

were drafted in 1939, establish

of $100 per share for preferred

shares.

in the
the

a par value

The articles go

on

to provide that preferred shares are subject to redemption by

FMI upon payment of $100 per share.
Common stock, on the other
payment only after preferred

hand, receives dividend

stock dividends have been paid,

and does carry a right to vote in and be

meetings.
of $100

While common
per share, there

common stock.

notified of general

stock was also assigned a

is no right of

par value

redemption for the

Historically, both common and preferred shares

have been sold at

equivalent values.

The market

for shares

of common and preferred stock has always been largely, if not

wholly, among existing shareholders.

Recent

estimates value

both types of stock at between $800 and $1,200 per share.

In 1988, there was talk of selling the corporation.
Plaintiff
was

both a

suggested
sale

Victor Merino Calenti (hereinafter "Merino"),1 who

board member
at a board of

of the

and a

common stockholder

directors meeting that,

corporation, FMI should

exercise its

of FMI,

prior to a
right to

____________________
1. Original plaintiffs consisted of a group including Victor
Merino Calenti, now deceased, and several other individuals.
For the sake of convenience, we refer to all plaintiffs-

appellants as "Merino."
-33

redeem all outstanding preferred stock for $100 per share, as

allowed in the

articles.

Merino's fellow directors

favor redemption of the preferred shares.

opinion between
both parties
recognized
corporation

Merino and his fellow

agree, from
that the

to repurchase

This difference of

directors stemmed, as

simple mathematics.

$100 redemption

did not

Both parties

price would

preferred shares

at a

allow the
price far

below their apparent market value, and that, upon liquidation

or sale, the value of FMI common shares would benefit greatly
from

such a purchase.2

shares of common
from the purchase

Needless to say,

Merino owned more

stock than preferred, and stood

of preferred

shares at a

to benefit

price that

the

others considered to be artificially low, while the directors

____________________
2. Roughly speaking, the parties agree that the corporation
would be obtaining shares apparently worth $800 each for only

$100 each. A subsequent sale of the entire corporation at

full market value would reflect the $800 value, and holders
of common stock could pocket the $700 per share difference.
Nonetheless, many holders of common stock are also
____
holders of preferred stock. Shareholders so situated would
lose money in the initial buy-back of preferred shares, only
to regain it upon sale of the entire corporation. Thus, only
shareholders who own a preponderance of common stock would
truly benefit from the buy-back of preferred shares at $100
per share.
Moreover,
we note
sua sponte that
stock prices
___ ______
fluctuate; that the current value of the corporate shares is
_______
not definitively known; that no sale of the corporation is
imminent; and that, depending on a wide range of variables,
redemption of preferred shares at $100 per share might not,
in the future, prove to be the bargain that the parties seem
to think it is.
-44

who opposed Merino's

suggestion owned

more preferred

stock

than common.3
In response
sought

to Merino's proposal,

the board first

the advice of a lawyer, one Matos, on the possibility

of converting all

preferred shares to common

counseled against

such a conversion.

the preferred

shares to common shares,

and approved a resolution

shares.

Matos

Instead of converting
the board considered

to amend the articles so

that the

corporation
shares.4

no

longer

had

right

Nonetheless, in keeping with

to

redeem

preferred

the articles, such an

amendment still had to be approved by a shareholder vote.

On

June 13, 1990, notice was sent to all shareholders that there
would be a shareholders' meeting on July 28, 1990, to vote on
the resolution which the board had approved.
Before the meeting could be held, Merino filed this
action against

his

fellow board

alia, that the

____

proposal amounted

members,

alleging,

to the issuance

of a

inter
_____
new

class of stock, and that the board's actions violated section

10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.
78j(b), (hereinafter "section 10(b)"),

17 C.F.R.

240.10b-5

(hereinafter "Rule 10b-5"), and Puerto Rico corporations law.

____________________
3. Initially, all shareholders held common and preferred
shares in equal proportions.
It was only over time that
Merino came to hold a preponderance of common shares.
4. The articles expressly state, "The Corporation reserves
the right to partially amend or alter these articles of
incorporation in accordance with the current laws."
-55

Merino

sought injunctive

judgment

that the

relief

proposed

as well

amendment was

settlement negotiations failed,

as a

declaratory

illegal.

After

defendants moved for summary

judgment.
The district court reasoned

that there was no sale

of stock for purposes of section 10(b), and that no violation

of Puerto Rico law had occurred.

It granted summary judgment

in favor of defendants, and this appeal followed.

II.
II.
___
DISCUSSION
DISCUSSION
__________
A. Standard of Review
______________________

subject

district court's

to

plenary review.

grant of

Alan Corp. v.
___________

Surplus Lines Ins. Co., No. 93-1697,

______________________
April 22, 1994).

summary

judgment is
International
_____________

slip op. at 6 (1st Cir.

We read the record indulging all inferences

in favor of the non-moving party.

Id.
___

appropriate

genuine

only

if there

is no

Summary judgment
issue as

is

to any

material fact and the moving party is entitled to judgment as

a matter of law.

Id.
___

B. Merino's Federal Securities Claims

______________________________________
The basis

of Merino's

claims under

section 10(b)

and Rule

10b-5 is that the

notice of the meeting

which was

sent to shareholders failed to disclose material information,

such as the existence of the Matos opinion and the directors'

-66

relative ownership
argues

of preferred and common

that this inadequate

shares.5

notice amounted to

Merino

a breach of

fiduciary duty.
We

begin

by noting

expressly declined to extend

laws into
Rather, it
state

the realm
has noted

law, and

that

the

Supreme Court

the reach of federal securities

of substantive state

corporations law.

that "[c]orporations are

investors

has

commit their

creatures of

funds to

corporate

directors on the understanding that, except where federal law

expressly requires certain responsibilities of directors with
respect to

stockholders, state law will

affairs of

the corporation."

(1975).

govern the internal

Cort v. Ash, 422

____
___

More specifically, the Court

U.S. 66, 84

has expressly refused

to extend section 10(b) to causes of action based on breaches

of state

law

corporate

fiduciary

duties.

See
___

Indus., Inc. v. Green, 430 U.S. 462, 477-80 (1977).

____________
_____
Biesenbach v.
__________
(declining

Guenther,
________

to apply

588 F.2d

section

400, 402

10(b) to

Sante Fe
_________
See also
___ ____

(3d Cir.

breach of

1978)

fiduciary

duty); Golub v. PPD Corp., 576 F.2d 759, 764 (8th Cir. 1978)
_____
__________
(similar).

____________________
5. Since commencement of this action, the proposed amendment
has been approved at a shareholder meeting.
Practically
speaking,
the record
shows that
most, if
not all,
shareholders were aware, or could easily have been made
aware, of the ramifications of the proposed amendment.
Merino continues to challenge the notice sent to shareholders
with regard to the meeting.
-77

Because
issue governed
Laws Ann.

shareholder meetings

by state

tit. 14

law, see, e.g.,

___ ____

1701-1717 (1989)

in

general

are

Chapter 107,

an
P.R.

(entitled "Meetings,

Elections,

Voting

expressed no

and Notice"),

intent to

and

because Congress

extend federal securities

has

laws into

the realm of fiduciary duties with regard to such meetings or

notices

thereof, Merino presents no

basis for a claim under

section 10(b) and Rule 10b-5.

Nonetheless, Merino
that the proposal of
issues.

has persisted in

his argument

the amendment raised federal securities

He has argued, both

below and on appeal,

corporation's elimination of its

own $100 redemption

creates a new type of stock, and that notice of

1990, meeting therefore constitutes
sale" for section 10(b)

purposes.

that the
option

the July 28,

notice of a "purchase or
More specifically, Merino

argues that prior to the proposal of the amendment, preferred

stock did not

share in

the equity of

the corporation,

that

only subsequent
__________

to

the amendment

stock

now "partake[]

of

the attributes

does the
of common

and

preferred
stock."

This line of argument is belied both by general principles of

corporate law and by the record before us.
Under general principles of corporate
law, preferred stock, although it has
privileges different from those of common
stock, is nevertheless a part of the
capital stock and has the characteristics
of capital stock.
In
other words,
preferred stock is generally understood
to represent an equity interest in the
-88

issuing corporation. . . .
Thus holders
of preferred stock in
a corporation
generally occupy, beyond the provisions
of
their
contract,
a position
no
different from that of holders of the
common shares, possessing all the rights
and
being
subject
to the
general
liabilities of ordinary stockholders.
18A

Am.

Jur.

omitted).
elsewhere
apply

2d

Corporations
____________

Merino

cites no

which suggests

here.

Nor

authority

that

does

438

the

(1985)

from Puerto

this general
record

(footnotes
Rico or

rule does

support

any

not
other

characterization of FMI's preferred shares.6

We

conclude by

noting

changed ownership

upon the

have

been

any

shares

Moreover, the

that

no preferred

enactment of the

substituted

for

essential elements of the

shares

amendment, nor

existing

shares.7

preferred shares in

this case have at all times remained intact.

The shares will

____________________
6. It appears from Merino's briefs that he viewed the preamendment preferred shares as not sharing in the equity of
the corporation precisely because they were subject to
redemption at $100 per share.
The foregoing authority
convincingly demonstrates that redemption options, as a
general matter, serve no such purpose.
Moreover, Merino's
argument overlooks the fact that the redemption option need

never be exercised by the corporation.

7. Merino alludes in his brief to 17 C.F.R.
230.145, which
provides, inter alia, that "reclassifications" involving the
_____ ____
"substitution
of one
security
for another
security"
constitute sales of securities. Merino does not argue, nor
could he on the record, that "another security" is being
substituted for preferred shares.
Accordingly, this case
presents no reclassification for purposes of 17 C.F.R.
230.145.
-99

continue

to receive

preferred dividends,

and they

gain no

Merino perceives,

namely,

voting rights.
In sum,

the evil which

the participation of
corporation, is
As

preferred shares in

not a by-product of

far as the record indicates,

always shared, and

Merino

cites no

would allow us to
the

the

the proposed amendment.

FMI's preferred shares have

will continue to
authority, nor

the equity of

share in FMI's

any record

conclude otherwise.

equity.

evidence, which

Equally important

is

fact that no "purchase or sale" has occurred for section

10(b)

and Rule

class

of

eliminate

stock
FMI's

10b-5 purposes,
by

proposing
right

to

nor has
to

amend

redeem

FMI created
its

a new

articles

preferred

to

shares.

Accordingly, the

"nondisclosures"

implicate duties under federal

district

court did

not err

complained of

failed

to

securities law, and thus, the

in dismissing

Merino's federal

claims.
C. Merino's State Claims
_________________________
Merino
arguing, inter
_____

also raised

several

state

alia, that the proposed

____

claims

below,

amendment benefitted

preferred shareholders at the expense of common shareholders,

and that the directors' approval of the amendment amounted to
a breach of fiduciary

duty.

The district court

disposed of

these claims by noting that common shareholders and preferred

shareholders

"are, for the most

part, comprised of the same

-1010

people."

Thus, the court saw

could be said
expense of
not

to benefit

the other.

dispose of

no way in which the amendment

one class of

Unfortunately,

Merino's

state law

shareholders at

the

this observation does

claims.

We

think

it

uncontroversial that

a director's fiduciary duty

is owed to

all stockholders, including minority stockholders.

mere fact that

Thus, the

most of Merino's fellow stockholders also own

preferred

shares does

fiduciary

duty.

not

mean

Needless

that

to say,

he

we

is

not

make no

owed

ruling

a
on

whether such a duty under Puerto Rico law was breached.

On
further.

the record

before us,

The record does

however,

not allow us

we can

go no

to determine either

the nature or the scope of a fiduciary duty under Puerto Rico

law, or the manner in
the facts before

us.

which such a duty would be

Rather, the record

applied to

only permits

the

conclusion that summary judgment was improvidently granted on

this

issue.

district

On

court

remand, we
reconsider

strongly
its

recommend

decision

to

that the
exercise

supplemental jurisdiction over this issue of Puerto Rico law.

To

the

arguments, they
attempt

at

extent
do so in

that

the

See
___

make

a perfunctory manner,

developed argumentation.

deemed waived.

parties

Wilson v.
______

United States,
_____________

slip. op. at 13 (1st Cir. May 4, 1994).

III.
III.
____

-1111

Such

other

without any

issues may

be

No. 93-2025,

CONCLUSION
CONCLUSION
__________
For
district

court

the

foregoing
granting

reasons,

summary

the

judgment

order

of

the

in

favor

of

defendants is
Affirmed in part, reversed in part, and remanded
___________________________________________________
for further proceedings consistent with this opinion.
_______________________________________________________
half costs to appellees.
________________________

One____

-1212